WEAKNESSES

RISK ASSESSMENT

Slightly improved growth prospects

Growth is expected to rally slightly in 2018, but, hit by weak mining product and hydrocarbon prices, will remain below the levels observed up to 2015. Foreign trade will still be the main growth driver, with higher exports of oil and liquefied natural gas (LNG). Nonetheless, this dependence on foreign trade makes the country extremely sensitive to world price movements and demand from its trading partners. Moreover, investment is expected to bounce back, especially in the oil and LNG sectors, where new projects are under way. However, they will not significantly improve the country’s infrastructure deficit, especially in terms of transport. This is because resources are limited by low levels of national savings, inefficient public spending programmes and public-sector companies, and the ongoing political risk affecting the country’s attractiveness for foreign investors. The agricultural sector, hit by poor weather conditions in 2016 and 2017, is expected to rebound, but will still be largely informal with low productivity and providing only subsistence agriculture for the population. Household consumption, representing only 48% of GDP, is expected to suffer from a continued high level of unemployment, especially among young people, and ongoing high inflation. Effectively, even if it comes down with the depreciation of the kina coming to an end, inflation will stay above the central bank target of 5%. The central bank’s ability to intervene remains constrained by its lack of independence and political interference.

Fragile current account surplus in the face of weak commodity prices

The current account balance has shown a large surplus since 2015 with the start of operations at new facilities for the exploitation of natural resources such as LNG. However, the drop in exports of mining products substantially reduced the current account surplus in 2016, and this position is unlikely to change in 2018, given the low momentum in commodity prices. Additionally, the current account surplus will decline slightly, affected by steady capital flight, slower Chinese growth, high consumption of raw materials, and still high imports, with the country dependent externally for many goods. The services and income balance is expected to continue to show a deficit.

Ongoing improvement in the public accounts

In 2017, the country was hit by a drop in budgetary resources associated with low commodity prices. Nevertheless, the fiscal deficit is expected to narrow further, as a result of the government’s drive to cut spending. The government is not set to significantly increase its revenues, in large part due to ineffective tax collection. In addition, LNG export income was lower than expected because of low LNG prices. There are risks of budget slippages, as during the parliamentary campaigns in summer 2017, Prime Minister Peter O’Neill committed to increasing public spending on the sectors prioritised for expansion (education, healthcare, infrastructure projects, and support for small- and medium-sized enterprises). Finally the public debt, though limited, is not expected to fall significantly.

Social and political tensions with the re-election of Peter O’Neill

Peter O’Neill (People’s National Congress) was re-elected to the position of Prime Minister by Members of Parliament in August 2017, after his party won the legislative elections that took place between June and July 2017. Allegations of fraud during these elections dealt a blow to the Prime Minister’s already declining popularity. There are likely to be many anti-government demonstrations, and political stability remains fragile. Given this enduring situation, the government could try to use the police and the army to strengthen its position, at the risk of triggering deadly clashes between the population and the law enforcement agencies as in July 2016.

The country still suffers from significant governance shortcomings and failings regarding the separation of powers. While he has committed to fighting corruption since coming to office in 2012, the Prime Minister was himself involved in a corruption scandal in 2014. The country was ranked 136th out of 176 countries on the corruption perception index, established by Transparency International in 2016, and the business climate remains poor. Finally, social tensions remain high, fuelled by inequalities and poverty.